Who deserves government bailouts?

by Business Times writer
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Two private businesses, Biyinzika Enterprises and Dei Group of Companies, have recently had their assets advertised in the newspapers destined for public auctions.

This happens when borrowers have defaulted on their loans, leaving the lenders no other option but to sell off the collateral in order to recoup as much of their money as possible.

A senior manager at Biyinzika, once upon a time the undisputed market leader in all things poultry, was quoted in the media as being pessimistic about a possible government bailout.

He should be. In light of the World Bank suspension of new development funding for Uganda, a debt-to-GDP ratio that has risen above the threshold 50% and the urgency to slash public sector budgets, pessimism makes sense. On the other hand, one cannot discount political expediency.

About 20 years ago, Basajjabalaba Hides and Skins found themselves in a $22 million hole. Hassan Basajjabalaba asked for state help. Despite the furious objections by Bank of Uganda Governor, Prof. Emmanuel Mutebile Tumusiime, a high level decision was taken to bail him out with UGX21 billion.  Twelve years after dishing out this money, the government was still in a twist over whether he had repaid it or not and as in common with the accountability of public funds, the issue has since disappeared into limbo.

Conventional wisdom says that for a government to bailout a private company it is because by not doing so, it would result in significant disruptions for the wider economy. Giving a financial lifeline can protect jobs, and maintain economic stability.

Just over a year ago, the government bailed out heavily indebted Roko Construction Limited by borrowing UGX202 billion from the Trade and Development Bank to acquire preference shares in the company. It was deemed that the Roko’s collapse would result in a domino effect that economy could ill afford, let alone the fact the government also owed the company a hefty UGX46 billion.

Biyinzika claim that the livelihoods of 300 direct workers and the incomes of another 5000 people are at risk unless they get some urgent assistance. A figure of UGX30 billion has been mooted to clear their debts and leave some for working capital.

Without delving into the finer details of Biyinzika’s downward spiral into financial distress, the government has two stark choices.

Say ‘yes’ and open itself up to another round of loud complaints about favouritism.  Say ‘no’ then the complaints are about lack of support for local businesses. There is another option of letting things drag along, but you can be sure the owners of these distressed companies are already frantically calling whoever has the President’s ear to intercede.

Government bailouts tend to be controversial and emotions can run wild. The owners take on the role of victims, complete with heart wrenching explanations that quickly draw mass sympathy. Unfortunately this diverts attention from the inner workings of their companies to explain their crisis.  Suddenly gone are the pompous airs and flashy lifestyle habits that characterized past dodgy financial management, as both admirers and detractors debate the merits of a bailout.

Critics say in giving a bailout, you are rewarding bad management decisions and what stops the same owners and managers from repeating exactly the same mistakes? You are using tax payers’ money with no guarantee of a recovery in the financial fortunes of that company. If a bank won’t risk anymore of its depositors and shareholders’ money, why should the government then raid the national treasury?

A couple of months after the outbreak of the Covid-19 pandemic, Dei Group founded by entrepreneur and chemist, Mathias Magoola, was triumphantly telling Ugandans, ‘DEI Group of Industries is launching a first of its kind hand and surface sanitizer that is guaranteed to remove all viruses including the Wuhan Covid-19, the Coronavirus.’

A year later, he hosted President Yoweri Museveni and then Deputy President, William Ruto of Kenya, to officially launch a $1 billion pharmaceutical manufacturing complex at Matugga. Before construction stalled because Magoola’s lenders turned off the cash taps, plans were for Dei BioPharma Limited to produce a variety of vaccines and drugs, including those for Covid-19, cancer and malaria.

Dei Group is a tricky one for the government. President Museveni likes the project as it speaks to self-reliance. In March this year, finance minister, Matia Kasaija, gave assurances that the government had agreed in principle to co-invest in the venture.

Although he declined to reveal any figures, by most accounts, Magoola wants a straight forward $600 million cash bailout to rid himself of his foreign and local creditors. He was not happy with the UGX70 billion that Parliament in meantime had allocated to him. To add some perspective, we are talking about handing over half of Uganda’s annual coffee export earnings to one man.

With his assets up for sale, Magoola is up against the wall and probably fixated with a meeting at State House, if it hasn’t happened already. In the case of Biyinzika, a bailout can quite possibly distort the market, hurting competitors who have strived for efficiency at scale but embraced risk management as their guiding star.

The government does not sit on a bottomless pit of money, but it has the highest credit rating in the land. When you are in a fix who better to turn too? In the wake of the Covid-19 pandemic the US government bailed out the airlines and so did the Germans, French and the Dutch. Not long ago, the UK government bailed out the Royal Bank of Scotland, but the Chinese have been bailing out state-owned companies for decades.

As of now, Uganda has no officially stated criteria, for deciding who and who does not qualify for a government bailout. Apparently it is a matter of lobbying. The World Bank suspension however, has been a huge blow and despite the brave front, the full impact is yet to be felt. Against this background, the moral hazard involved with bailouts becomes more telling.

How can you slash education and health budgets and yet find money to bail out private companies?

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